Essential Corporate News: Week ending October 14, 2022

FRC: FRC Lab Report - Net Zero Disclosures

On October 11, 2022 the Financial Reporting Council’s Lab (FRC Lab) published a report which explores investor expectations and highlights information that would provide better and more useful disclosures on greenhouse gas (GHG) emission reduction commitments, covering many of the current regulatory requirements for net zero reporting. With the report, the FRC Lab has published a separate detailed example bank providing a number of practical examples of current good practice to help companies improve their disclosures in this area.

Investors and other stakeholders want to understand companies’ commitments to reduce GHG emissions, their targets to reach net zero or carbon neutrality and their abilities to deliver against those targets. In July 2022, the FRC CRR team published a TCFD thematic report which sets out expectations for companies, as well as five areas for improvement which are consistent with the investor expectations highlighted in this report. Better information in financial statements, including connecting net zero targets to relevant disclosures, was one of those five areas.

The FRC Lab’s review of net zero and GHG reduction commitment reporting identified that there is a need for more useful disclosures around:

• Commitments: the level of ambition, scope, nature and timing of the commitment, and what is included and excluded.
• Impacts: how the commitment impacts strategy and business model, including information on transition plans, assumptions, uncertainties, and risks and opportunities.
• Performance: how performance is being measured in the short, medium, and long term. How high-quality data and accountability will be ensured, and actions management is taking in response to changes.

The report provides guidance on elements to consider in each of these areas when preparing net zero disclosures, both at a foundational and an advanced level.

It also notes that effective processes and governance underpin commitments, plans and ultimately, lead to better and more useful disclosures. Robust processes, systems and controls will enable companies to better understand their progress, iterate and achieve their net-zero commitments over the longer term. Conversations with companies about their processes, challenges and successes to date suggest that there are four stages which align to the three-stage iterative approach to providing net zero disclosures for investors:

• define the commitment;
• assess the impact;
• measure progress; and
• refine the approach.

The FRC Lab comments that this is an emerging area of reporting, and it expects that as companies mature their processes and controls, as well as progress on their journeys to reduce GHG emissions, reporting will likewise be refined and improved to move from providing foundational to advanced disclosures. It sees these areas as inherently interconnected, so that improving one area should help companies improve across the other areas as well. For example, improvements to data gathering could build a better understanding of the GHG footprint and potentially allow for management to bring previously excluded scopes into the commitment. Likewise, enhanced data would allow for a better understanding of impact on the business strategy and model.

While the FRC Lab hopes this report and its related example bank provide some useful guidance, it expects that market disclosures will evolve as investor expectations and reporting requirements increase, in particular, in relation to the development of ISSB standards and proposals for the publication of transition plans in the UK,  and  further clarity on local jurisdictional net zero commitments, including any mandatory requirements on companies.

(FRC, FRC Lab Report – Net Zero Disclosures, 11.10.2022)

(FRC Lab, Net Zero Disclosures Example Bank, 11.10.2022)

(FRC Lab, Net Zero Disclosures – Summary of Findings, 11.10.2022)

London Stock Exchange: Updated Admission and Disclosure Standards published

On October 10, 2022 the London Stock Exchange plc published Market Notice 19/22 summarising feedback it received on a consultation it launched in May 2022 (via Market Notices N12/22 and N14/2022) and revised Admission and Disclosure Standards (Standards). The updated Standards are effective from October 10, 2022.

The May consultation related primarily to the creation of a new Voluntary Carbon Market and other amendments to the Standards. This followed an announcement by the London Stock Exchange at COP26 that it would be developing a market offering to support publicly traded carbon funds and an announcement in November 2021 that it was  developing a new market solution to accelerate the availability of financing for projects that will support a just transition to a low-carbon economy.  

Market Notice N19/22 states that there was universal support for the objectives of the London Stock Exchange in establishing the Voluntary Carbon Market designation. This seeks to identify funds and operating companies that are investing in climate change mitigation projects. N19/22 addresses repeated themes arising in the responses in greater detail and, where appropriate, makes amendments to the Standards.

The updated Standards are here and are effective immediately, other than the changes to the early notification period (as set out in Rule 2.16 of Section 2), which take effect 30 days from October 10, 2022.

(London Stock Exchange, Market Notice N19/22, 10.10.2022)

TCFD 2022: Status Report

On October 13, 2022 the Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board (FSB), published its 2022 Status Report. 2022 marks five years since the TCFD published its final recommendations in 2017, and the 2022 Status Report assesses developments and progress during that time.

As part of its assessment, the TCFD reviewed publicly available reports of over 1,400 companies from eight industries and five regions to better understand current climate-related financial disclosure practices and their evolution. In addition, the TCFD conducted two surveys, one to gain insight on asset managers and asset owners’ TCFD-aligned reporting practices and the other on companies’ efforts to implement the TCFD recommendations as well as investors and other users’ views on the usefulness of climate-related financial disclosures for decision-making. The TCFD found the results of its disclosure review and surveys encouraging but believes more urgent progress is necessary to achieve the milestones identified in its 2017 report. The TCFD remains concerned that not enough companies are disclosing decision-useful climate-related financial information, which may hinder investors, lenders, and insurance underwriters’ efforts to appropriately assess and price climate-related risks.

Key takeaways and findings are as follows:

• The percentage of companies disclosing TCFD-aligned information continues to grow, but more urgent progress is needed. For fiscal year 2021 reporting, 80% of companies disclosed in line with at least one of the 11 recommended disclosures; however, only 4% disclosed in line with all 11 recommended disclosures and only around 40% disclosed in line with at least five.
• All regions have significantly increased their levels of disclosure over the past three years. In particular, the average level of disclosure across the 11 recommended disclosures for European companies was 60% for fiscal year 2021, growing 23 percentage points since fiscal year 2019; 36% for Asia Pacific companies, an increase of 11 percentage points; and 29% for North America companies, an increase of 12 percentage points.
• A majority of asset managers and asset owners report to their clients and beneficiaries. Over 60% of asset managers and over 75% of asset owners surveyed indicated they currently report climate-related information to their clients and beneficiaries, respectively. The majority of asset managers report through sustainability reports or directly to clients, while the majority of asset owners report through annual, sustainability, or climate-specific reports.
• Nearly 50% of asset managers and 75% of asset owners reported information aligned with at least five of the 11 recommended disclosures. Based on survey responses, 60% of asset managers and nearly 80% of asset owners indicated they report information aligned with at least one recommended disclosure, whereas only 9% of asset managers and 36% of asset owners report on 10 recommended disclosures. None indicated they report on all 11.
• The percentage of companies disclosing the TCFD recommendations in financial filings or annual reports has increased each year. Based on the TCFD survey, over 70% of companies implementing the TCFD recommendations disclosed climate-related information in financial filings or annual reports (including integrated reports) for fiscal year 2021 compared to 45% for fiscal year 2017.
• The availability and quality of climate-related financial disclosures has increased since June 2017. 95% of survey respondents saw an increase in the availability of climate-related financial disclosures since the release of the TCFD recommendations, with 88% of respondents citing improvements in the quality of disclosures.
• Investors and others use disclosures in decision-making and pricing. Based on the TCFD survey, 90% of investors and other users incorporate climate-related financial disclosures in financial decision-making, and 66% of these indicated such disclosures factor into the way they price financial assets. In addition, based on a literature review, there is a growing body of evidence that climate-related risks are beginning to affect prices for certain types of assets.

(TCFD, 2022 Status Report, 13.10.2022)